Thanksgiving and Autumn Wrap-Up: Deere’s Fourth-Quarter Report

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As the Thanksgiving season approaches, along with the end of autumn, Americans prepare for a feast of food and football. However, it’s not just the holiday spirit that has investors eagerly anticipating this time of year – agricultural equipment maker Deere is set to release its fourth-quarter earnings report.

Investors have much to be thankful for when it comes to Deere’s fiscal performance in the fourth quarter. However, their enthusiasm wanes when it comes to the guidance provided by the company, as it falls short of expectations.

Deere’s fiscal year concludes in October, coinciding with the end of the harvest season in the United States and the Northern Hemisphere. In their latest report, Deere (ticker: DE) announced fourth-quarter earnings per share of $8.26, generated from equipment sales of approximately $13.8 billion. This figure surpasses Wall Street’s projections of earnings per share of $7.46 from machinery sales amounting to around $13.6 billion. Comparatively, in the previous year, Deere reported earnings per share of $7.44 and equipment sales totaling $14.4 billion.

Despite the positive financial results, Deere stock experienced a decline of 5.6%. Surprisingly, it was not the earnings that led to this dip; rather, it was the outlook for the future.

Peering ahead into fiscal year 2024, Deere predicts a net income ranging from $7.75 billion to $8.25 billion. However, Wall Street analysts anticipate a higher net profit of $9.3 billion.

These projections imply a decline from the full-year net income of $10.2 billion recorded in 2023, reflecting concerns about farm incomes and agricultural product prices hitting their peak. It seems that a downward trend is approaching, and unfortunately, Deere’s guidance failed to meet analysts’ expectations.

Over the past year, corn and soybean prices have dropped by approximately 29% and 4%, respectively. The U.S. Department of Agriculture projects farm income to reach $141 billion in 2023, down from $183 billion in 2022.

Although falling commodity prices and income are accompanied by potential challenges in equipment demand and pricing, it’s important to note that farm income remains at a reasonably healthy level. In fact, the projected $141 billion figure would mark the second-highest reading on record.

In a recent report, Citi analyst Timothy Thein highlighted that most dealers anticipate a decline in 2024.

Deere’s Earnings Report Highlights Caution in Outlook, but Possible Soft Landing

Deere recently visited several Deere dealers and shared key takeaways from their findings. While there is more caution in the outlook, it appears to resemble a potential “soft landing” at this point.

Conservative Guidance and Positive Growth Expectations

Deere’s tendency to guide conservatively is evident. Last year, at the start of fiscal year 2023, Deere initially projected a net income of $8 billion to $8.5 billion. However, throughout the year, management revised this estimate upwards. Currently, Deere expects to achieve a net income ranging from $9.75 billion to $10 billion. On the other hand, Wall Street analysts project a slightly higher net income of $10 billion.

Investor Interest in Dealer Inventories and Ordering Patterns

Deere’s management will be hosting a conference call at 10 a.m. Eastern time to discuss the results. Investors are particularly interested in learning about dealer inventories and ordering patterns.

Potential Stock Movement and Analyst Outlook

Options markets suggest that Deere’s stock may experience around a 4% fluctuation following the earnings release. Historically, the stock has moved an average of about 5% in the past four quarterly reports, with two increases and two decreases.

Thein currently rates Deere shares as a Buy, setting a price target of $475 for the stock. Analysts covering the stock mostly rate it as Buy, with approximately 60% of analysts providing this rating. This is slightly higher than the average Buy-rating ratio for stocks in the S&P 500, which stands at about 55%. The average analyst price target for Deere’s stock is approximately $440 per share.

Price-to-Earnings Ratio and Investor Sentiment

Deere’s stock is currently trading at about 11.5 times the estimated calendar year 2024 earnings, while the S&P 500 trades at approximately 18 times. This discount exists due to investor concerns about the challenges facing the agricultural sector.

Over the past 12 months, Deere’s stock has declined by about 8%, while the S&P 500 and Dow Jones Industrial Average have seen increases of about 13% and 3%, respectively.

Impact on Caterpillar (CAT)

Following Deere’s earnings report, Caterpillar (CAT) experienced a 2.6% decline in its stock price.

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